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Energy

PTT, BANPU top the list

Energy

Investment view. Although we see no near-term catalyst for the energy sector, we

expect this sectors' earnings to be more resilient than others given the gradual

improvement in global economic outlook and good balance in oil demand/supply, with

OPEC as a supply stabilizer. The current valuation at <10x P/E for 2014F for several

energy stocks in SCBS universe (vs. the market's 13x) with dividend yield of >4% is also

attractive. Our top picks for the sector are PTT and BANPU.

3Q13 earnings recap: boosted by oil price recovery. Most oil and gas companies

reported better profit than anticipated QoQ in 3Q13. This came from a rise in the

average oil price of US$5.3/bbl from 2Q13 (+5.3% QoQ) which gave refiners a huge stock

gain, enough to offset the weaker GRM on lower demand for gasoline and fuel oil.

Refiner core profit slid 7.9% YoY on lower oil price and product margin.

4Q13F outlook: marginal risk from volatile oil price. Operating profit will be stable

from 3Q13, with the caveat that volatile oil prices could bring some stock gain/loss in

4Q13F. Based on current prices, we believe oil price could average US$1/bbl in 4Q13F

and bring a slim stock gain/loss of US$0.5/bbl. Another risk for oil refiners is lower

GRM, which continues to weaken on lower demand for gasoline. This bodes ill for ESSO

and IRPC given their proportion of light refined products of >30%.

Oil supply could pressure crude oil price marginally. The IEA recently revised up

global oil demand growth for 2013-14F to reflect the strong demand in 3Q13 but we

still expect oil price to soften in 2014F as the market will be well supplied by non-OPEC

producers. With a rise in the use of clean energy such as ethanol and biodiesel, we

believe the oil price could be depressed from the supply side. At the same time, higher

supply could be absorbed by higher non-OECD demand, mainly in Asia and the Middle

East. Supply disruption from geopolitical uncertainty in the Middle East and North

Africa will continue to be a swing factor for the oil market. Average 2013 Dubai price is

expected to decline by 3.3% YoY to US$105.3/bbl, still beating the below-US$100/bbl

expected. We expect this could fall slightly to US$103-104/bbl in 2014F.

Near-term coal price outlook improving gradually. Market sentiment on nearterm

coal price outlook has improved from the previous three months. The API coal

price for 2014F rose 3.2percent from the past three months to US$83.4/t, slightly above

current Newcastle price at US$82.8/t. We expect support from more disciplined coal

production by key players to reduce oversupply in 2014F. More production cutbacks will

be seen next year in Indonesia since many producers are now selling their coal at

below cash cost of ~US$80/t for new coal mines. Higher seasonal demand for heating

fuel in 4Q13-1Q14 should continue to support coal price in the near term.

Top Buys: PTT, BANPU. We like PTT, with a 15percent fall in share price over the past two

months yet stronger earnings in 2014F due to the earlier resumption of full operations

of GSP#5 and possible upside from compensation for LPG and NGV losses. We also

favor BANPU on its improving earnings outlook thanks to its cost reduction program.


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